Savings and Long-Term Investment is the Path to Sustainable Recovery

There is no shortage of opinions on how we ended up in this global economic meltdown: greedy Wall Street executives, lack of government regulation, capitalism was doomed to consume itself. Who always seems to get off scot-free is the American consumer. Ok, maybe not scot-free since the average American is certainly suffering, but the free-spending, debt-addicted consumer shoulders a hefty portion of responsibility for our current troubles (As we stated in “It Wasn’t My Fault.”) Post Depression through about 1980 the savings rate averaged around 8%. All through this period America thrived and the standard of living rose considerably. New financial products were created allowing people to take advantage of the American Dream, and still we saved.

From 1980 through 2005 we kind of lost our rational compass. The saving rate dropped below 1% and even went negative at time. (Meaning as a nation we were spending more than we were making.) This fueled tremendous economic growth but even a 5th grader could see that it’s not sustainable. (And we’re all smarter than a 5th grader, right?) All through this period the pundits howled about the low American savings rate and how much more the rest of the world saved. We were becoming a nation of debtors.

Suddenly the party ended and in December 2008 the savings rate climbed back to 3.6%, and is forecast to go much higher throughout 2009. This is a good thing, right? Personal savings is a primary domestic source of financing for capital investments – those investments that drive long-term economic growth.

But wait! Apparently the government now thinks we’re not spending enough. “Please Mr. and Mrs. Consumer, don’t pay down your existing debt, spend more money to save short-term jobs.” (I think it’s the politicians jobs their most worried about.) I get it. Americans think in very short time horizons. We want next month to be better than this month, and 5 years from now is too far off to worry about. But think about it; if overspending got us in to this mess in the first place, who in their right mind thinks it will get us out? (I’ll bet not your 5th grader.)

There is no short-term cure for a long-term problem. American’s need to save, and we need to invest. What we don’t need to do is spend more. Be more thoughtful about daily expenses. Invest in your retirement! (It’s coming sooner than you think.) Borrow money wisely and for good purposes. Buy or improve your real estate, start or run your company, get your kids, or yourself, an education, but stop paying 28% interest to buy a pair of jeans when you already have 10 pair in the closet. And if your 3 year old car is running fine, drive it for a few more years.

Let’s save the economy and our country’s future by saving ourselves and saving our money. We saved, grew and prospered for 35 years after WWII. We can have balance again and, more importantly, sustainable economic growth and prosperity.

Author’s Note: The irony of being in the private mortgage lending business and pushing people to save is not lost on me. I am a big proponet of the wise use of debt, and lower leveraged real estate investments can create tremendous long-term wealth for genertions to come. (That new bass boat however…)